The Bush administration is considering a partial nationalization of some banks, buying up a portion of their shares to shore them up and restore confidence as part of the $700 billion government bailout. The notion of government ownership in the financial sector, even as a minority stakeholder, goes against what market purists say they see as the foundation of the American system.

Yet the administration may feel it has no choice. Credit, the lifeblood of capitalism, ceased to flow. An economy based on the free market cannot function that way.

Although credit plays a certain role, it is not the life-blood of capitalism. The life-blood of capitalism is capital, specifically financial capital, not credit. What’s the difference? The answer hinges upon whether credit is capital. But even if credit is financial capital, that doesn’t make it the life blood of capitalism. For credit certainly is not the only type of financial capital there is.

But, in fact, credit is not capital. It cannot be; and this is one of those things that is true by definition. Sadly, it’s now one of those things that is no longer obvious.

It think it helpful to begin, just for clarity’s sake, by distinguishing two types of capital: capital in the form of goods, and financial capital.

Briefly a capital good is something which produces means of production, as opposed to a consumption good. More particularly, a capital good is a reproducible means of production. There is no fixed chasm which would make a good only a capital good and never a consumption good. Take, for example, my journal. As the book into which I write what my fevered brain imagines, my journal is a consumption good: it does not produce means of production; it just gets used; it satisfies a want.

But if, after I have become worm food, my daughter decides to publish my journal (to provide society with a good laugh) it can become a capital good. It is a good which can be transformed into a consumption good, satisfying some other humans’ wants (e.g., the want of a good laugh).

My brother-in-law’s guitars can be either consumption goods or capital goods depending upon the use he makes of them. If he sits around in his house strumming and picking away at them, they are consumption goods. If he forms a band, arranges gigs and actually picks up a few bucks, then those guitars are capital goods.

I suppose you could look at it this way. A consumer good is any good of any kind which can satisfy a consumer want, while a capital good is any good which can be made into a consumer good.

Financial capital, on the other hand, is the net amount of money invested in an enterprise, the sum of money, prices for assets related to an enterprise minus financial obligations. So if you have a business enterprise and I were to ask you, “How much capital do you have invested in your business?” You might tell me that the figure is one million dollars.

By that figure you mean that if you sold off all of the assets, all of the equipment you use in your operation, the property your operation sits on, and then paid off all of your debts, whatever is left over is the capital tied up in that enterprise. It should be one million dollars; that’s your financial capital.

Note that your debts do not count as capital. They are not capital goods. They are not financial capital. In calculating the amount of financial capital you’ve invested in your enterprise, your debts do not count. To the extent that you have debt, you do not have capital.

It is true that many entrepreneurs will borrow money to launch their business ventures. True as that may be, it is also true that credit constitutes a debt, not capital. Does it need to be shouted from roof tops that debt is not the life-blood of capitalism?

Debt is really a form of poison to capitalism. Take, as a case in point, the role that debt has played in our present economic crisis. In actual point of fact, it could be argued that the present credit crunch is capitalism at work. Debts that cannot be – or just are not – paid are of no value to capitalism. It’s actually worse. As the contrary of capital, debt – credit – creates a different kind of economy; and it is not a capitalist economy. You cannot have a capitalist economy where there is no capital, specifically, financial capital; where you have debt, you have no financial capital.

This puts in stark relief Faiola’s assertion that, “An economy based on the free market cannot function [if credit has ceased to flow].” The fact is, we don’t have an economy based on a free market. We have an economy based on government largesse, which generously (to listen to its defenders talk) permits a relatively free market. The difference is not simply the existence of government regulations. The more important difference is the role of our fiat money system. In a free market system, people would be free to use any money, any commodity, they can get each other to accept. Not only that, they would be free to introduce new money based on any commodity at all, whether gold, silver, tobacco, gold-pressed latinum – whatever. Our fiat money means that rather than government being dependent upon us for its own life-blood (to use Faiola’s terminology) we are dependent upon government for our life blood. In a very real sense, our fiat money system means that the government owns everything; for we cannot engage in trade with out its money, what it calls money, what it commands us to accept as money.

Free market? Not when the government arbitrarily prints up new “money” (worth just a few cents) declares – dictates – it to be worth something whether the market agrees or not, and tosses it around, depriving the already extant “money” of its previous purchasing power and (this is my favorite part, just because it’s so brilliant) blaming the so called free market for this so called inflation.

Pop quiz: If the government increases the money supply by 15%, while the amount of capital and consumer goods remains the same, what happens to the prices of those goods?

For extra credit: Why does the result (whatever it is) happen?

Use of the term “free market” reminds me of the movie, “Princess Bride”: